Unit 4 · Level 1 · The crypto map
Stablecoins: crypto's dollars
Stablecoins are tokens built to sit at $1: crypto's cash. Some are backed by real dollars in reserve (USDC, USDT), some by locked crypto worth more than the coins issued (DAI). And some were backed by nothing but an algorithm and confidence. That last kind has a graveyard all of its own.
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What you get asked
Match each stablecoin design to how it holds its peg
Every stablecoin is a promise. The real question is always: what exactly stands behind that promise, and who checks?
May 2022: Terra's UST 'stablecoin' collapsed, erasing roughly $40 billion. What made it so fragile?
UST's $1 was backed by a promise to mint LUNA, a token whose value depended on people believing in UST. Circular confidence works until the day it doesn't.
Put the Terra/UST death spiral in order (May 2022)
That's a death spiral: the mechanism meant to defend the peg became the engine that destroyed it. It took about a week.
Even 'safe' stablecoins can wobble: in March 2023 USDC briefly ___ to about $0.87 when a bank holding part of its reserves failed.
USDC recovered within days once the reserves were confirmed safe, but a depeg can hit even the best-run stablecoin. 'Stable' means 'usually'.
Why do traders 'park' money in stablecoins instead of cashing out to their bank?
Stables are a trading-desk parking spot, not a savings account. They're an IOU from the issuer, with no deposit insurance. And UST lured savers with a 'safe' 20% yield, so always ask: where does the yield come from? 🐜
The rest of this unit
BTC, ETH, alts, stablecoins, CEX vs DEX: the whole territory.